Cap and trade — tough questions

During July 22 Senate Agriculture Committee hearings on cap and trade legislation it became quickly apparent that major questions have yet to be answered by proponents.

Even with Agriculture Secretary Tom Vilsack presenting a fresh study showing the impact of cap and trade on agriculture would be negligible, senators from both parties were reluctant to buy what the Obama administration was selling.

The new analysis claims if cap and trade is adopted, net farm income would take a 1 percent hit in the short-term to just over 7 percent in later decades.

However, that lost income would be made up by cap and trade program returns estimated at $1 billion annually from 2015 to 2020. That figure could swell to $20 billion annually by 2040 to 2050.

Even in that happy scenario fundamental questions remain. For instance:

Is the ultimate goal of the proposed legislation truly to turn back climate change? If so, what good would it do for the United States to adopt such a system if China and India — both major polluters — aren’t along for the ride?

Why subject an already shaky U.S. economy to further turmoil without assurances from India and China?

What are the underlying assumptions behind USDA/EPA modeling?

Is the USDA capable of running a massive, new program even as implementation of the latest farm bill lags?

Somewhat surprisingly, the EPA and USDA were unable, or unwilling, to fully answer such foundational queries.

Certainly, if cap and trade legislation eventually passes the Senate it will be over the loud objections of several Midwest senators’ constituents.

“My mail is running about 99 to 1 against (cap and trade),” said Sen. Ben Nelson, a Nebraska Democrat, during the hearing. “I’ll use the parade analogy, as well. What are people yelling at (me) during parades? It’s, ‘No to cap and trade!’”

Many, many variables

On average, USDA analyses say between 2012 and 2018, total cap and trade expenses for agriculture would be “$700 million per year in real dollars,” said Tom Harkin, D-Iowa, committee chairman. “But the other side of the equation is that the offset markets would cover these costs?”

“That’s correct, but I’d like to expand on this a bit,” answered Vilsack. “It is somewhat difficult to conduct a full and complete analysis because there are many, many variables. We tried to come up with a very conservative estimate of the impact. By ‘conservative’ I mean we didn’t take into consideration, when looking at the expense side — there are two components to it: direct (fuel for tractors and combines) and indirect (fertilizer) energy costs — we didn’t ask what changes would be made if fuel prices were to go up and farmers would figure out how to use less.

“Since 1970, we’ve seen a fairly consistent pattern of farmers basically figuring out how to do more with less. But we didn’t factor that in. Nor did we factor in any technology changes that could impact fuel usage. Nor did we figure the impact on the bioenergy side….”

Asked if he is “bullish” on the latest USDA analysis, Vilsack said that is the case. “On a whole, I think farming agriculture in this country will benefit (from cap and trade) and also the rural communities.”

Biofuels

In the 2007 energy bill Congress committed to steadily increasing use of biofuels “as a key element of national strategy to reduce dependence on petroleum,” said Harkin, addressing Jackson. “We need to make sure the marketplace can accommodate that increasing supply and the key issue today is” the allowable blend percentage for ethanol. The amount of ethanol being produced will soon exceed the amount that can be used at 10 percent.

Meanwhile, EPA is considering a request to grant a waiver that would allow ethanol blends of up to 15 percent in gasoline-fueled vehicles. Harkin said the 10 percent blend limit “was plucked out of thin air in the Clean Air Act. I remember when it was passed.

“We have a lot of data and I’ve seen a lot of information come in that (the blend) could be as high as 20-some percent and would have no effect whatsoever on present internal combustion engines. …When can we expect a ruling on the (15 percent blend) request?”

The public comment period on the waiver request just closed on July 20, said Jackson. “EPA received thousands of comments. As required, we’re evaluating those comments as well (as gathering) data from several engine tests that are being conducted….”

The Clean Air Act gives the EPA up to 270 days — which would end on Dec. 1 — to render a decision.

“You just came on board at EPA,” said Harkin. “But there’s a feeling amongst some of us … I’ll be very frank with you, that there’s a built-in bias within EPA against biofuels. That could be wrong. I’m just telling you, there’s a sense amongst a lot of us that there is some bias at EPA against biofuels … going back 20 years.”

China/India

The impact of cap and trade legislation on international trade obligations is also a sticking point. If a climate bill passes Congress, would the United States be more vulnerable to challenges before the WTO?

The answer is yes, said Sen. Pat Roberts, R-Kans., who then asked Bob Stallman, Texas rice farmer and American Farm Bureau Federation (AFBF) president, if it is “possible the very countries that are major contributors of global greenhouse gases would initiate these challenges?”

They would, said Stallman. In fact, “India has already said as much. China has already talked about what border tariff barriers would mean and how much they dislike them. We expect a full range of challenges on those kinds of border measures included in Waxman/Markey and may be also included in the Senate (bill).”

Due to energy cost increases, the recently passed House bill already makes the United States “less competitive. Then, we flip around and try to figure out how to protect our industries that trade in the international markets. It’s like we’re trying to do two wrongs to make a right. We don’t believe it will work.”

The question about China is “really intriguing,” said Roger Johnson, president of the National Farmers Union (NFU). “Fundamentally, that’s why many of us have argued that in the trade agreement we need to have environmental and labor standards and those kinds of things negotiated as part of the trade agreement.”

All agree “it isn’t fair competition to have one country producing things and externalizing much of the cost of production by dumping them on the rest of either their society, or in the cases of greenhouse gases, on the world. At the same time, other countries are following the rules and have higher costs. This is more of a trade issue than a greenhouse gas issue.”

Stallman, with a tinge of sarcasm, said he “can’t wait until we have the EU standards imposed on (the United States). That’s what we’re talking about … so we oppose that approach. As the price for offsets goes up for a limited group of farmers it also means the cost of energy is going up for all farmers.”

The chances of China accepting a trade agreement with the United States “dictating certain standards … are slim and none,” said Roberts. “And slim left town.”

If cap and trade legislation is passed, “very clearly it’s going to impact our ability to export on the world market,” said Sen. Saxby Chambliss, R-Ga., ranking committee member. “I’m one of those that long advocated that the future of American agriculture — the ability to make a profit — depends on our ability to export.”

In such an environment, China and India — “two countries that are probably the biggest competitors for our cotton farmers” — have already “stated flatly that they don’t intend to take any action (on climate) irrespective of what we do.”

Mexico, too, “is unlikely to take much, if any, action. A country like Mexico — which has a huge export of agricultural products into the United States — would be one of the countries that might potentially have tariffs imposed.”

What does Vilsack think about the United States imposing tariffs on agricultural products of countries that don’t participate in a cap and trade program?

Vilsack sidestepped. “I’m not sure I’m willing … to acknowledge the foundation of your question, which is that countries internationally will not do anything in this area.”

While traveling overseas last year “I got the sense they were waiting for the United States. They wanted to see action. They wanted to see leadership from the United States. My view is the world is waiting for us. When and if the United States moves, I think we’ll create — along with many other nations — a significant amount of momentum.

“Will what other countries do be precisely what we agree on? Be precisely in the process? I don’t know. But I’d be very, very doubtful that countries as large as China and India will essentially, ‘do nothing’ on this. I really expect them to be participating in some form or another.”

Chambliss: “Obviously, if anything is enacted here I’d hope you’re correct in that prediction. But the fact is, Mr. Secretary, just this week they told (Secretary of State) Clinton that basically (the United States) can do what it wants but they intend to do nothing. …I’d hate to see us get into a contest where we’re throwing rocks at other countries for their failures to take action (on the climate). We’ll be put at a disadvantage because they’ll retaliate.”

Winners and losers

What about cap and trade legislation creating winners and losers among those in U.S. agriculture?

“Your testimony states that the carbon credit income potential is significant for your members,” said Roberts to Johnson. “The effects of this bill worry me. While all producers will have to pay more for input costs, not all producers will receive offsetting income since not all of them can go to no-till, or plant trees….”

Johnson conceded the point. “Clearly anytime you pass legislation you create winners and losers. I don’t think there’s another way to look at it. There will be some farmers who will be in a very strong position. They’ll have the opportunity to do lots of offset income. Others will have minimal opportunities and will face increased costs. I don’t think there’s much debate on that.”

That’s one of the reasons the NFU argues that “a chunk of the allowances need to be set aside. That way, if you need to design a practice to compensate some of the losers, you can do that.”

Some — including the AFBF — have advocated for an “off-ramp” provision in any climate legislation. That way, if certain targets aren’t met, the United States could pull out of any climate deals.

Harkin wants a more immediate plan, one that could be used as early as December when a major, international climate conference is scheduled in Copenhagen. “If we put in place a good cap and trade system that incorporates agriculture, gives adequate offsets and allowances to agriculture, and we go to Copenhagen to start down this road and other countries don’t join us — India and China — then we have an off-ramp. That’s the off-ramp I’m thinking of.

“We’ll provide the leadership and say we’re going to be very aggressive with this in the United States, that we’ll push as hard as we can for clean, renewable energy and resources. But we want other countries to come in (as well). If not, we’re off the highway.”